“It's gone from a big focus on how to sell them to "let's get the investment part of right,'” said Jeremy Thiessen, managing director of Pension Consulting Alliance Inc. in Portland, Ore., who works with 10 states and 20 college savings programs. He sees more knowledgeable 529 plan board members getting more involved in hiring investment expertise, including consultants.
Like their public pension fund counterparts, “boards are starting to recognize the benefit of outside investment expertise from a governance perspective,” said Andrea Feirstein, managing director of AKF Consulting Group in New York, which advises state 529 plan administrators on plan design and structure. “We see more investment consulting engagements enhancing the 529 boards' important decisions.”
The increased sophistication can cut both ways, noted Laura Lutton, director of Morningstar's funds of funds research. “I think the states feel more empowered with the advice of the investment consultant to come back on underperforming options. Most states have investment consultants who come in to scrub, or are on retainer. We think that's a good trend because it's good to have an extra set of eyes,” said Ms. Lutton, whose firm evaluates and rates 529 plan managers each year (see sidebar on Page 14).
Today, top 529 managers include T. Rowe Price Group Inc., TIAA-CREF, Vanguard Group Inc. and American Funds.
According to Morningstar, two of the top-rated plans are Alaska's $2.2 billion plan and Maryland's $3.8 billion plan, both managed by T. Rowe Price. The other two top-rated plans are Nevada's $9.1 billion plan, managed by Upromise Investments Inc., and the internally managed $6.5 billion Utah Educational Savings Plan. All four are sold directly to consumers.
In direct-sold plans, which rely more on index funds, “when an active manager performs, you automatically leapfrog ahead,” said Tom Kazmierczak, head of retirement and college products and vice president at T. Rowe Price in Baltimore. “Some of the state treasurers want the lowest cost; others think about what is best net-of-fees performance,” said Mr. Kazmierczak.
At T. Rowe Price, where 529 managers rely heavily on the firm's internal asset allocation committee, the past year has brought increases in international exposure and holdings in real assets. Michael Conrath, 529 program director at J.P. Morgan Asset Management, agrees. He sees movement “away from plain vanilla, especially fixed income, and toward considering emerging markets, high yield, inflation protection. We think this is the right way to invest. It's a trend we're starting to see more and more, especially adviser-sold.”